1. Note that there is an overlap between the TF and multiple-choice questions, as some of the TF statements are used in

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Indicate whether the statement is true or false.

• Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in

multiple-choice questions.

Multiple Choice: True/False

In most corporations, the CFO ranks under the CEO.

• True
• False

• The Chairman of the Board must also be the CEO.
• True
• False

• The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking

individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.

• True
• False

• Partnerships and proprietorships generally have a tax advantage over corporations.
• True
• False

• A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal

liabilities in the event of bankruptcy than are investors in a typical partnership.

• True
• False

• An advantage of the corporate form of organization is that corporations are generally less highly regulated than

proprietorships and partnerships.

• True
• False

• Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.
• True
• False

• One advantage of the corporate form of organization is that it avoids double taxation.
• True
• False

• It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

(Fundamentals of Financial Management, Concise Edition, 11e Eugene Brigham, Joel Houston) (Test Bank all Chapters) 1 / 4

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• True
• False

• One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.

This problem would be avoided if you formed a corporation to operate the business.

• True
• False

• If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders

will have to pay personal taxes on the firm's net income.

• True
• False

• If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes.

This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

• True
• False

• It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive

legal documents are required.

• True
• False

• The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
• True
• False

• One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's

investors to transfer their ownership interests.

• True
• False

• Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are

not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

• True
• False

• In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the

long run, or the stock's "intrinsic value."

• True
• False

• If management operates in a manner designed to maximize the firm's expected profits for the current year, this will

also maximize the stockholders' wealth as of the current year.

• True
• False
• / 4

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• In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
• True
• False

• In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a

specific target date.

• True
• False

• As a result of financial scandals occurring during the past decade, there has been a strong push to improve business

ethics.

• True
• False

• There are many types of unethical business behavior. One example is where executives provide information that they

know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.

• True
• False

• A stock's market price would equal its intrinsic value if all investors had all the information that is available about the

stock. In this case the stock's market price would equal its intrinsic value.

• True
• False

• If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it

would be a good buy.

• True
• False

• If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold.
• True
• False

• For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
• True
• False

• The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price

fell and sell it if it rose, barring any new information coming out about the stock. It is the "marginal investor" who determines the actual stock price.

• True
• False

• Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is

exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible. 3 / 4

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• True
• False

• A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and

replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake.

• True
• False

• If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby

increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

• True
• False

• If someone deliberately understates costs and thereby increases profits, this can cause the stock price to rise above its

intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the firm itself can be penalized.

• True
• False

• If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific

stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.

• True
• False

Indicate the answer choice that best completes the statement or answers the question.

33. Multiple Choice: Conceptual

Please note that some of the answer choices, or answers that are very close, are used in different questions. This has caused us no difficulties, but please take this into account when you make up exams.

Which of the following statements is CORRECT?

• One of the disadvantages of incorporating your business is that you could become subject to the firm's

liabilities in the event of bankruptcy.

• Proprietorships are subject to more regulations than corporations.
• In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
• Corporations of all types are subject to the corporate income tax.
• Proprietorships and partnerships generally have a tax advantage over corporations.

• Which of the following statements is CORRECT?
• One of the advantages of the corporate form of organization is that it avoids double taxation.
• It is easier to transfer one's ownership interest in a partnership than in a corporation.
• One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.
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